CMGI Revenues Growing: So? Dave Marino-Nachison (TMF Braden)
November 17, 1999
Trying to get a handle on sprawling Internet venture fund CMGI (Nasdaq: CMGI) can be a difficult task for investors, but one thing is certain: grasping at efficacious numbers just isn't the way to go. Yesterday, for example, CMGI Chairman and CEO David Wetherell said at a Bloomberg-sponsored conference in San Francisco yesterday that CMGI will be the second-largest Internet company, revenue-wise, when its fiscal year ends in July.
CMGI, Wetherell said, will fall in somewhere between leading online services company America Online (NYSE: AOL) and portal giant Yahoo! (Nasdaq: YHOO) by midsummer. The effect of comments like that is to draw casual comparisons between CMGI and the two giants of Internet industry -- because anything more than a casual comparison is a pretty fruitless exercise.
It doesn't take much energy to realize that while parallels between the companies' revenue streams certainly exist at various points -- the advertising and e-commerce revenues that come from operating online cynosures AOL, Yahoo!, and Lycos (Nasdaq: LCOS), of which CMGI is a top shareholder -- but those parallels only go so far.
Even more disparate are the companies' individual roads to profitability. CMGI, after all, managed an impressive $453 million in net income for fiscal 1999 (ended July 31). However, the company's actual operations didn't provide much in the way of help, having turned nearly as much in operating losses as they did in revenues; but tack on profits from sales of Lycos stock, an investment in Reel.com and others, and you've suddenly got huge earnings numbers without having your actual businesses make a cent.
Compare that to AOL or Yahoo!, which post nice operating profits but can't boast the same outlandish net profits the sales of investments bring in and you won't learn much.
It's quandaries like these that can make Internet-era investing -- particularly in companies like CMGI -- such a handful for everyone from studious Fools to conflicted Wall Street analysts. Whereas it's easy enough, at almost any level, to study a company's business and the metrics and factors that mark its health and growth, many of the emerging businesses make such an exercise nearly impossible.
In CMGI's case, after all, many of the company's investment dollars are in operations that aren't public, so tracking them individually is essentially impossible. Besides, what would you learn? One of the next businesses CMGI plans to take public is online vitamin retailer MotherNature.com, which television watchers will remember as the "$20 off everything" company. Those should be some interesting revenue numbers.
Investors are instead forced to bank primarily on the abilities of Wetherell not only to pick quality businesses to incubate but to effectively gauge the market's desire to have such a company go public (or the likelihood of a third party to be interested in buying a stake for more than CMGI paid for it).
But guess what? While that's not something easily tracked statistically, perhaps the best way to measure that is through that "other income" line item, in many ways a measure of the market's affirmation of CMGI's decisions measuring as it does the sale value of the company's various investments. Even better, head to the cash flow statement, where you'll find a company building its cash balance off investment and financing income while losing money from operations like it was the next big thing (which, apparently, it is). Not exactly the way many of us learned it in school, is it?
Of course, given that the market's fancy can change at any time, trying to guess where CMGI will end up in, say, five years based on past performance is nigh-unto impossible. But one thing's for sure: using Internet buzzmetric revenue growth as a key indicator isn't going make things much easier. That's not to say sales growth isn't important; but recent history has shown it doesn't do much to justify the valuations of AOL or Yahoo! either.
People a lot smarter than I are working on getting their arms around this topic as we speak: probably the best starting point on the subject is the "CashFlow.com: Cash Economics In the New Economy" report by Michael Mauboussin.
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